"Fitch expects the domestic banks' asset quality to weaken further, with stressed assets to rise from 10 per cent at mid-2013 to around 15 percent by the end of FY15," it said in a note. Stressed assets, which include gross non-performing assets and restructured debt, stood at 10.2 per cent as of September.

In its report focused on banking in emerging markets, Fitch said the "downside risks are greatest" in China and India. The agency said state-run banks will be the most affected.

The state-run banks will require Rs 3.8 lakh crore or $60 billion in capital till 2019 for migrating to Basel-III guidelines, it said, adding that the extension given to implement the higher capital norms will provide a breather. The reasons cited for the deteriorating quality of assets at banks include slackening economic growth, intervention by the judiciary, delays in project approvals leading to a sense of 'policy paralysis' and high interest rates.

The Reserve Bank of India and the government have flagged this as a major concern and have initiated steps, including a new policy for early detection and resolution of bad loans, which was implemented from April 1.

PTI